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Will Bank of Montreal Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Until recently, retirees had relied on financial stocks for decades because of their stable income and solid fundamentals. But the U.S. housing bust and financial crisis changed all that, as banking stalwarts were shaken to the core by huge asset writedowns and the need for massive bailouts. In Canada, though, Bank of Montreal (NYSE: BMO) and its compatriot banks got through the crisis in much better shape, as Canada's housing market hadn't bubbled up to nearly the same extent. Five years later, though, are Canadian banks still a smart play? Below, we'll revisit how Bank of Montreal does on our 10-point scale.

The right stocks for retirees With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.

Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.

Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.

Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.

Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Bank of Montreal.

Bank of Montreal has enjoyed the favorable environment that Canadian banks generally have experienced in 2012. With earnings up more than 6% year over year and income from its Capital Markets division more than doubling, Bank of Montreal certainly isn't complaining about Canada's financial health.

But even as U.S. households have deleveraged by getting debt off their personal balance sheets, Canadians have gone the opposite way. With the average Canadian consumer carrying debt levels of 163% of their income, both Moody's and Fitch Ratings have noted the trend as troublesome for Canadian banks, and Moody's came out with downgrades of Bank of Montreal as well as competitors Royal Bank of Canada (NYSE: RY) , Toronto-Dominion (NYSE: TD) , and Bank of Nova Scotia (NYSE: BNS) .

One way Bank of Montreal has tried to expand its business is by looking south of the border. With its purchase of Marshall & Ilsley last year, the bank succeeded in boosting its net interest income and held its own against Toronto-Dominion's U.S. expansion.

For retirees and other conservative investors, Bank of Montreal has had a good run, and its current valuation still leaves room for growth. Although the Canadian economy may show signs of stress, having geographical diversification can be extremely valuable. If you're looking for exposure to financial stocks, it's worth looking north at Bank of Montreal and its relatively conservative stature.

Keep searchingFinding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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